It has been said that those who cannot remember the past are condemned to repeat it. It has also been said that someone who repeats the same action over and over, expecting different results, is an idiot.
If so, the EU Commission is a bunch of condemned idiots.
Sorry for the colorful opening, but just when the Commission has started talking about backing off austerity, they are forcing Greece to put to work perhaps the most devastating austerity package to date. Without even a hint of remorse over the past, blaming instead the negative results of previous packages on “mistakes” by the Greek government, the Commission charges ahead with demands that Greece cut away 6.5 percent of its GDP in the next austerity round.
I am not even going to attempt to predict the social, economic and political fallout of this complete fiscal madness, though it might be a good idea to remember that in last year’s Greek election the Nazis returned to the European political scene. I will say this, though: the Germans tried a decade of austerity during the Weimar Republic. Greece is now six years down the same path.
Before we get to the report on more Greek austerity, let us first note a new report from Pew Research Center. It presents some seemingly bizarre data, showing that a majority of Europeans still support austerity:
The countries still backing cuts over spending included Italy and Spain, which are both in the grip of prolonged recessions made worse by their efforts to bring down government borrowing. On average, 59% backed further austerity in the survey, against 29% in favor of more spending to stimulate the economy.
You would expect the victims of austerity to demand something better. But in order to do so the Europeans would have to know of an alternative – and it does not exist in their world view. For a good decade now, the public policy debate in Europe has been almost entirely lopsided in favor of austerity. Everyone from leading economists to political leaders to business leaders have been telling the public for years that the alternative to austerity is Hell on Earth.
When people see no alternatives, then after a while they tend to believe that there are indeed no alternatives.
Besides, the very issue of austerity is technical in nature and not likely to stimulate the average Joe to go off looking for alternative views on his own.
One would think that the hardships suffered in, e.g., Greece and Spain would be enough to make the general public back off from austerity. After all, the benefits they have been promised from austerity never seem to materialize. This is a valid point, but at the same time, history is full of examples of man’s ability to accept and endure hardships in the name of some abstract goal. It will probably take an entire generation before Europeans start questioning the changes for the worse that they are now living through.
With this in mind, it is easier to understand why Greece – ground zero of European austerity – is entering yet another cycle of fiscal torture. From Fox Business:
Greece is on track to meet its budget targets this year and next but may have to make further cuts in 2015 and 2016, the European Commission said in a report that will provide the basis for a decision Monday on whether to release more bailout loans for the country. The report sums up the findings of the three institutions overseeing Greece’s bailout–the Commission, the International Monetary Fund and the European Central Bank–which sent a team of auditors to Athens earlier this spring to review the country’s finances.
As I explain in Austerity: Causes, Consequences and Remedies, a country will always see a reduction of its government deficit the year after an austerity package is implemented. Then, as the negative multiplier effects of austerity kick in, the budget improvement is reversed. That is why the European Commission is forecasting more austerity in 2015 and 2016. However, you only need to take a quick look at macroeconomic data from Eurostat to realize that the notion of no budget cuts in 2014 is optimistic.
And now, Fox News delivers the big number:
It is the first time in Greece’s three-year-old aid program that the country is deemed to have met its goals. In past years, a deeper-than-expected recession and government missteps led Greece to miss its targets. The draft notes that the Greek government has followed through on most of the austerity measures it promised for 2013 and 2014–also in sharp contrast with previous assessments of Athens’ efforts to ease its crushing debt load. ”The very large and highly front-loaded package of fiscal consolidation measures for 2013 and 2014–totalling over 6.5% of gross domestic product–agreed in the previous review has been largely implemented,” the report says.
Six and a half percent of GDP.
Let’s leave the technospeak behind for a moment. An austerity package of 6.5 percent of GDP means that government is going to increase what it takes from the private sector by 6.50 euros for every 100 euros that people earn. Not for every 100 euros it currently takes in – it is 6.50 euros for every 100 euros of GDP.
The 6.5 percent number is a net tax increase on the Greek economy. It does not matter what the combination is of spending cuts and tax increases: the Greek government is telling its taxpayers that it is going to raise the price of whatever it provides them by 6.5 percent of all the money that all taxpayers earn.
If all of the austerity comes in the form of spending cuts, and taxes do not go up, then government is saying “we are going to sell you a 2011 car at 2013 prices”; if all of the austerity comes in the form of tax hikes, and spending is not cut, then government is saying “we are going to sell you a 2013 car at 2015 prices”.
Either way, government will increase its net drainage from the economy by 6.5 percent of GDP, and front load the plan so most of it shows up in one year. All this in a country that has already lost 25 percent of its GDP in five short years, all due to austerity.
I would not want to set my foot in Greece over the next year.
Apparently, the EU Commission has an eerie feeling that something bad might come out of this. According to Fox Business they are quick to add fine print to their optimism:
Beyond 2014, the outlook is uncertain and depends “on the strength of the recovery and improvement in taxpayer capability to service their tax obligations,” the commission says. It estimates the country’s budget gap at around 1.8% and 2.2% of GDP in 2015 and 2016 respectively.
This is B.S., Barbara Streisand. They have made similar predictions in the past, all of which have turned out to be outlandishly optimistic. So long as they believe that austerity somehow will improve the performance for the Greek economy, they will continue to believe that the first-year effect of an austerity program will become permanent.
I would not want to be a Greek politician saddled with implementing this chainsaw massacre of an austerity program. Perhaps some of the elected officials in Athens are on the same page, or why else would they according to Fox Business be so eager to promise that “there will be no more belt-tightening”?
Fox Business does not elaborate on this. Instead they conclude their report with a couple of notable factoids:
The country is in its sixth year of a deep recession made worse by waves of austerity. Unemployment, already over 27%, is expected to continue rising.
So if they acknowledge that the waves of austerity have made the recession worse, then why doesn’t Fox Business ask the EU Commission why this particular austerity package would do the trick?
In case anyone is still in doubt what this new austerity package will do to the Greek economy and to Greek society, please re-read the statement above about unemployment.
The Greek government is sitting on one side of an open powder keg. On the other side the EU Commissioners are sitting, smoking big fat cigars. The Greek government is holding out an ashtray where the Commissioners are supposed to kill their cigars. It’s dark, so it’s hard to see the ashtray.
There’s the future of Greece for you.
After four years of austerity, with drastic government spending cuts and higher taxes, the euro zone countries should have been on a path back to prosperity by now.
That is, if austerity had been the right medicine.
It was not, though, and there is ample evidence to prove that, both empirically and analytically. Today we can add even more evidence to the pile: in the lastest study of unemployment, Eurostat reports that the euro-zone countries that have taken the hardest austerity beating exhibit the highest unemployment numbers. This is logical to anyone properly trained in economics, and it appeals to common sense. However, Europe’s political elite is apparently as baffled as your average Austrian economist. Euractiv reports:
Employment and Social Affairs Commissioner László Andor called new unemployment rates released by Eurostat yesterday (2 April) “unacceptable” and “a tragedy for Europe”. The eurozone has hit the 12% mark for job-seekers, compared to 7.7% in the USA.
The main reason why the United States does not have a higher unemployment rate is that we have yet to subject ourselves to fiscal torture, a.k.a., austerity. That said, unless Congress does something before the end of this year we are going to face a significant increase in taxes as Obamacare goes into full effect. That will undoubtedly cost us the fledgling recovery we are in now.
Back to Euractiv, which reports that the 12-percent level of unemployment in the euro zone is up from 10.9 percent a year ago:
In total, the number of job-seekers in February jumped to 19,071 million, almost two million more that the previous year. For the EU 27, the total number of unemployed stood at 26,338 million, more that two million more that in 2012. … “Such unacceptably high levels of unemployment are a tragedy for Europe and a signal of how serious a crisis some eurozone countries are now in. The EU and its member states have to mobilize all available instruments to create jobs and return to sustainable growth,” said Employment and Social Affairs Commissioner László Andor, as quoted by spokesperson Chantal Hugues.
This is typical hot air coming from a representative of the bureaucracy that has forced country after country into the dungeons of austerity. Greece has lost a quarter of its GDP in four years under the EU’s boots of an unforgiving combination of spending cuts and tax increases. Portugal has been brought to the brink of social unrest by similar policies, and some provinces in Spain are moving toward secession – again a result of reckless fiscal policies.
Now the same commission that authorized – not to say ordered – the jobs-destroying policies is demanding – and presumably soon ordering – more jobs to be created.
On one topic, though, the commissioner’s empty words do have a bit of substance. Euractiv again:
“Young people need more support to acquire the right skills to increase their chances of getting a job and finding vacancies that exist. This is why the Youth guarantee, agreed by EU ministers on 28 of February, must be put in place urgently,” Hugues added.
While a “youth guarantee” won’t create any jobs, the concern for the young is at least a sign that there is some sort of contact with reality in the Eurotarian hallways. Perhaps the good commissioner and his colleagues have seen enough of the surge in activity by the Nazis in Greece to realize what is about to happen in Europe?
The concern for the consequences of high youth unemployment is also reflected in an article in The EU Observer:
Unemployment among the under-25s is particularly high. More than one in two young people are without work in Greece (58.4%) and Spain (55.7%). In Portugal, it is 38.2 percent and in Italy 37.8 percent.
Europe is turning into an economic wasteland, right before our eyes. Years of increasingly invasive regulations and taxes, combined with a work-discouraging welfare state, laid the groundwork for economic stagnation. Then, as the Great Recession came sweeping across the world, deficits opened up in the government budgets of Europe’s over-bloated welfare states. In response, ill-informed and arrogant members of Europe’s authoritarian political elite – the Eurotarians for short – began demanding destructive austerity policies in return for deficit-funding grants and other forms of short-sighted support.
The price for this colossal economic mismanagement of an entire continent is now being paid by the young. The EU Observer again:
The high unemployment rates, particularly among the youth, have led politicians to increasingly speak of a “lost generation” with little prospect of finding work. “We are in a double dip recession. Unemployment is up, up and up. When is growth going to come?,” Bernadette Segol, the head of the European Trade Union Confederation asked recently.
A glimmer of hope, though:
She suggested the persistent focus on austerity measures is leading to “doubts” about the benefits of belonging to the European Union. The eurozone’s growth prospects also compare badly with other regions. While the 17-nation currency area economy is expected to contract by a further 0.3 percent this year, the US economy is expected to grow 1.7 percent in 2013. China’s GDP is growing at about 8 percent a year.
I would not take the Chinese number very seriously. There is still a lot of political inflation in growth numbers coming out of that country. The ruling communist party demands regional leaders to “produce” certain levels of growth year after year. If the regions don’t deliver, their leaders are punished. Therefore, in order to keep their jobs and remain in good standing with the rulers in Beijing, many regions simply report the growth rates that the commycrats want.
That said, the Chinese economy would only have to grow at two percent per year to do better than the European economy – in itself a fact that speaks volumes to the complete and utter disaster that is unfolding in the Old World.
And worst of it all is that it is entirely politically generated. A Godzilla-size government filled with over-paid, politically arrogant bureaucrats listened to Austrian economists who suggested that austerity was the way forward. From the deliberate destruction of economic activity would, the Austrians said, rise a phoenix of prosperity and jobs.
Of course, that would all happen in the long run.
Europe’s young are waiting to learn just how long that run is going to be.
Some surprising news this morning: the Greek prime minister declares “no more austerity”. Can this really be true?
Greek Prime Minister Antonis Samaras on Saturday promised his recession-weary nation that there would be “no more austerity measures” as international creditors prolonged an audit of crisis reforms. “There will be no more austerity measures,” Samaras said in a televised speech to his conservative party’s political committee. “And as soon as growth sets in, relief measures will slowly begin,” Samaras said. But he noted that Greece’s ailing economy was “out of intensive care, not out of the hospital.”
It is important to understand what an austerity cease-fire means. It stops the rise in taxes and halts the cuts in government spending. That’s all. The cease-fire does not in itself bring forward any reforms to the economy: there are no changes to government spending programs, no changes to the tax system and no reforms that otherwise would boost economic activity.
Therefore, the prospect of an improvement in the Greek economy is only marginally better if the prime minister can actually deliver on his promise. The marginal improvement consists, plainly, of avoiding a certain collapse under the pressure of austerity. That will not help spark any recovery.
The key issue, though, is whether or not government will actually be able to keep its no-more-austerity promise. As we go back to EUbusiness.com, we learn that the pressure for deficit-reducing spending cuts is still on:
Representatives from the so-called troika of Greece’s creditors — the European Union, the European Central Bank and the International Monetary Fund — are currently reviewing the steps Greece has taken to meet its multi-billion bailout obligations. Thorny issues that Athens still needs to address include shrinking the number of jobs in the public sector, speed up privatisation plans and recapitalise four of its main banks. … Under the bailout conditions adopted last year, Greece needs to cut public sector workers by 25,000 in 2013 and a total of 150,000 by the end of 2015. The job cuts have sparked friction with Samaras’ junior coalition partner Fotis Kouvelis, head of the moderate Democratic Left party, who is citing Greece’s soaring unemployment rate.
And all of this without cutting taxes to stimulate the private sector. In other words, a lingering austerity pressure.
If Greece does indeed abandon austerity, it would be a relief in the short term that would probably help the country avoid a political collapse. It would also inspire other countries in similar situations – Italy, Portugal, Spain, even France and down the road the Netherlands – to do the same. That said, since the underlying problems, caused by an overbloated welfare state and excessive taxes to pay for it, will remain, then so will the budget deficit.
If there was a major flight from austerity, the EU would effectively be left with member states that turned their back on the deficit-capping stability and growth pact. That, in turn, would shake the foundations of the euro.
For this reason, I find it unlikely that the EU and the ECB will allow Greece to simply stop austerity. More likely is a moratorium for a year, and then a return to the same policies under the auspices that the economy is “improving” and strong enough to endure more of the same.
The European crisis is gaining more and more attention. Two days ago George Friedman, founder of the global intelligence research firm Stratfor, wrote an interesting article about the fragile state of affairs in Europe:
The global financial crisis of 2008 has slowly yielded to a global unemployment crisis. This unemployment crisis will, fairly quickly, give way to a political crisis. The crisis involves all three of the major pillars of the global system — Europe, China and the United States.
Just a quick note: the initial crisis was financial on the surface, but underneath it was the crisis of the welfare state, a system of entitlements and taxes that has been structurally unsustainable for a long time. For each recession since the oil crisis in 1979 the European welfare states have been nudged a little bit closer to the point where they become acutely fiscally unsustainable. With this recession came the point where Europe’s big entitlement systems finally overburdened their host organism, the private sector.
As the welfare state began falling apart, the EU-ECB-IMF troika set out to save it with harsh, depression-inducing austerity policies. The medicine made the patient worse, which is why there is an unforgiving unemployment crisis sweeping across Europe – with, yes, a political crisis on its tail.
Mr. Friedman does not see the welfare state’s role in this, but his analysis is nevertheless important. He points out that the exact nature of the crisis varies from country to country, but…
there is a common element, which is that unemployment is increasingly replacing finance as the central problem of the financial system. … Last week Italy held elections, and the party that won the most votes — with about a quarter of the total — was a brand-new group called the Five Star Movement that is led by a professional comedian. Two things are of interest about this movement. First, one of its central pillars is the call for defaulting on a part of Italy’s debt as the lesser of evils. The second is that Italy, with 11.2 percent unemployment, is far from the worst case of unemployment in the European Union. Nevertheless, Italy is breeding radical parties deeply opposed to the austerity policies currently in place.
This is exactly the point that I have been making for more than a year now. Glad to see others are paying attention.
The core debate in Europe has been how to solve the sovereign debt crisis and the resulting threat to Europe’s banks. The issue was who would bear the burden of stabilizing the system. The argument that won the day, particularly among Europe’s elites, was that what Europe needed was austerity, that government spending had to be dramatically restrained so that sovereign debt — however restructured it might be — would not default.
Then Mr. Friedman reveals that he has been glancing at this blog – how else would he reach the conclusion that austerity is bad for the economy…? No one else makes that point:
One of the consequences of austerity is recession. The economies of many European countries, especially those in the eurozone, are now contracting, since austerity obviously means that less money will be available to purchase goods and services. If the primary goal is to stabilize the financial system, it makes sense. But whether financial stability can remain the primary goal depends on a consensus involving broad sectors of society. When unemployment emerges, that consensus shifts and the focus shifts with it. When unemployment becomes intense, then the entire political system can shift.
It is unclear how austerity would save the financial system – the banks – even from the perspective of someone who truly thinks austerity is good for the economy. All that austerity does, according to its many supporters, is to reduce the budget deficit which raises the price of treasury bonds and reduces, perhaps even reverses, the upward pressure on interest rates.
The only link to the banking system is that they have invested heavily in treasury bonds and that austerity – if it worked according to its theory – would then improve their balance sheets. It appears to be the case that banks did indeed load up with treasury bonds prior to this recession, an aggravating circumstance that – given the destructive nature of austerity – could prolong or even accelerate the recession. Mr. Friedman does not clarify if he shares this view of where the banks fit in to the crisis picture.
He does, however, make the important observation that the Italian election is more of an accelerator than a brake pedal in the ongoing European crisis:
Only four countries in Europe are at or below 6 percent unemployment: the geographically contiguous countries of Germany, Austria, the Netherlands and Luxembourg. The immediate periphery has much higher unemployment; Denmark at 7.4 percent, the United Kingdom at 7.7 percent, France at 10.6 percent and Poland at 10.6 percent. In the far periphery, Italy is at 11.7 percent, Lithuania is at 13.3 percent, Ireland is at 14.7 percent, Portugal is at 17.6 percent, Spain is at 26.2 percent and Greece is at 27 percent. … more than half of Germany’s exports go to other European countries. Germany sees the European Union’s free trade zone as essential for its survival. Without free access to these markets, its exports would contract dramatically and unemployment would soar.
And with the escalating crisis in the EU, the German economy is in trouble. The latest forecast is that the German GDP will contract for this year, but let’s not forget that the situation gets worse with each forecast, as forecasters see that the real world is faring worse than they predicted.
In other words, Mr. Friedman is right on the euro here, and he reinforces his point by explaining how the structure of the euro zone might actually aggravate the current crisis:
The euro is a tool that Germany, with its outsized influence, uses to manage its trade relations — and this management puts other members of the eurozone at a disadvantage. Countries with relatively low wages ought to have a competitive advantage over German exports. However, many have negative balances of trade. Thus, when the financial crisis hit, their ability to manage was insufficient and led to sovereign debt crises, which in turn further undermined their position via austerity, especially as their membership in the eurozone doesn’t allow them to apply their own monetary policies.
This is indeed a very important analysis of the role that the euro plays in the crisis. Germany, says, Mr. Friedman, has by design or by intent rigged the euro zone so as to be to its own foreign-trade advantage. So long as the weaker economies were on board with the stability and growth pact this was a game Germany could not lose. But once the debt flood gates opened in Greece, and the EU rushed in with its austerity demands, it was only a matter of time before the crisis would hit Germany.
The euro zone’s artificial terms-of-trade relations work both ways, with menacing symmetry.
Mr. Friedman then moves on to a discussion about the geo-political consequences of the economic crisis:
Portugal, Spain and Greece are in a depression. Their unemployment rate is roughly that of the United States in the midst of the Great Depression. A rule I use is that for each person unemployed, three others are affected, whether spouses, children or whomever. That means that when you hit 25 percent unemployment virtually everyone is affected. At 11 percent unemployment about 44 percent are affected. … in Greece, for example, pharmaceuticals are now in short supply since cash for importing goods has dried up. Spain’s local governments are about to lay off more employees. These countries have reached a tipping point from which it is difficult to imagine recovering. In the rest of Europe’s periphery, the unemployment crisis is intensifying. The precise numbers matter far less than the visible impact of societies that are tottering.
I would disagree about the role of the numbers. But be that as it may. Mr. Friedman is expressing great concern about what the future holds for the countries in Europe that are now effectively in a depression. I am entirely on board with his statement that it will be difficult for Greece and Spain to come back from this, though I also know that the day they decide to structurally eliminate their welfare states things will get a lot better.
That is, however, little more than a dream right now. In the way of such fundamental reforms lies, e.g., the stubborn and very destructive support among Europe’s political elites for a continuation of austerity.
Mr. Friedman sees a glimmer of hope on that front, though he does not quite define it that way:
The idea that the Germany-mandated austerity regime will be able to survive politically is difficult to imagine. In Italy, with “only” 11.7 percent unemployment, the success of the Five Star Movement represents an inevitable response to the crisis. Until recently, default was the primary fear of Europeans, at least of the financial, political and journalistic elite. They have come a long way toward solving the banking problem. But they have done it by generating a massive social crisis. That social crisis generates a political backlash that will prevent the German strategy from being carried out. For Southern Europe, where the social crisis is settling in for the long term, as well as for Eastern Europe, it is not clear how paying off their debt benefits them. They may be frozen out of the capital markets, but the cost of remaining in it is shared so unequally that the political base in favor of austerity is dissolving. This is compounded by deepening hostility to Germany. Germany sees itself as virtuous for its frugality. Others see it as rapacious in its aggressive exporting, with the most important export now being unemployment. Which one is right is immaterial. The fact that we are seeing growing differentiation between the German bloc and the rest of Europe is one of the most significant developments since the crisis began.
A good analysis indeed. Turning again to Italy, Mr. Friedman concludes:
The Five Star Movement’s argument in favor of default is not coming from a marginal party. The elite may hold the movement in contempt, but it won 25 percent of the vote. And recall that the hero of the Europhiles, Mario Monti, barely won 10 percent of the vote just a year after Europe celebrated him.
In other words, there may be enough political strength building against austerity. I pointed to this after the Greek election in June last year. And already in May last year I explained that the real winners in the welfare-state crisis are the fascists. I am glad to see that Mr. Friedman’s analysis is catching up with mine:
Fascism had its roots in Europe in massive economic failures in which the financial elites failed to recognize the political consequences of unemployment. They laughed at parties led by men who had been vagabonds selling post cards on the street and promising economic miracles if only those responsible for the misery of the country were purged. Men and women, plunged from the comfortable life of the petite bourgeoisie, did not laugh, but responded eagerly to that hope. The result was governments who enclosed their economies from the world and managed their performance through directive and manipulation. … when we look at the unemployment rates today, the differentials between regions, the fact that there is no promise of improvement and that the middle class is being hurled into the ranks of the dispossessed, we can see the patterns forming. … Whether it is the Golden Dawn party in Greece or the Catalan independence movements, the growth of parties wanting to redefine the system that has tilted so far against the middle class is inevitable.
Indeed. The problem now is where Europe is heading next. If Mr. Friedman is right in that the support for austerity is coming to an end in Europe, then there are only two ways forward: the freedom-pursuing way to a structural termination of the welfare state, or the authoritarian route led by parties like Golden Dawn. (There are others to factor in, such as the party duo governing Hungary; the Front National in France; the new nationalist coalition in Britain; and the nationalist parties in Scandinavia.)
I have warned of Europe’s authoritarian future for some time now. I wish I did not feel reinforced by Mr. Friedman’s analysis in that being my default forecast for Europe. Nevertheless, as time goes by, the crisis deepens and nothing is done to stop it, the authoritarian alternative gains momentum.
There is a dark cloud hanging over Europe. Let’s hope it won’t spread its darkness beyond the Old World.
It is beginning to dawn on the European political elite that their superstate project, their welfare state and their currency union are on a runaway train heading for disaster. Media is beginning to pick up on that as well. Here is a nice summary by Benjamin Fox at the EU Observer:
February 22 was a black Friday wherever you were in Europe. The morning brought the publication of dismal economic data to the effect that the eurozone will remain in recession in 2013.
Only a statistical illiterate would have thought otherwise.
Then, at 10pm Brussels time as the the markets closed, ratings agency Moody’s quietly issued a statement stripping the UK of its AAA credit rating. For those lulled into a false sense of security through a recent combination of relatively benign financial markets and the euro strengthening against sterling and the yen, it was a rude awakening.
That surge was due mainly to one thing: the commitment by the European Central Bank to print an infinite amount of euros to back its worst-rated treasury bonds. That commitment told global investors that “you can get seven percent return on Spanish treasury bonds and always get your investment back from us – come Hell or High Water!” Of course the euro is going to experience a temporary surge under such ridiculous, and totally unsustainable conditions.
EU Observer again:
Reading the European Commission’s Winter Forecast is a singularly dispiriting experience. The bald figures are that the eurozone is expected to remain in recession with a 0.3 percent contraction in 2013. The words “sluggish … weak … vulnerable … modest … fragile’” litter the 140 pages of charts and analysis.
Some examples of GDP growth numbers from the Forecast: Britain +0.9 percent in 2013; Austria +0.7 percent; Germany +0.5 percent; France +0.1 percent; Netherlands -0.6 percent; Italy -1.0 percent; Spain -1.4 percent; Portugal -1.9 percent; Greece -4.4 percent.
There are a couple of exceptions with slightly higher growth rates, primarily Sweden and Poland. Both economies are heavily dependent on exports and compete increasingly for the same low-paying manufacturing jobs. Due to a better working labor market and a more friendly tax environment my bet is Poland will eke out a victory in that competition, which would further depress the Swedish growth number.
That aside, there is a lot to be seriously worried about in the Commission’s Winter Forecast numbers. The overall standstill in GDP is very worrying, as 2013 represents the fifth year of a crisis that was originally relatively manageable but which has been made far worse by disastrous austerity measures. Since the Eurocracy – both political and administrative – remains committed to austerity, it is basically impossible to find any scenario that would allow Europe’s troubled economies to pull out of this endless recession.
I have warned about this before, and I recently drew the conclusion that Europe is in a state of permanent decline and that this permanent decline involves a drastic reduction in the standard of living for young Europeans – their prosperity is, so to speak, on hold. I also recently explained that Europe now represents what we could define as industrial poverty, that it is becoming an economic wasteland plagued by high unemployment, a static standard of living and overall lost opportunities for everyone except a small, political elite that – thus far – can live high on the hog in the Eurocratic ivory tower.
Perhaps I should take joy in the fact that my analysis has been spot on all the way. But that would be cynical, and I am not prone to either cynicism or schadenfreude. I am sincerely angered by what big government has done to Europe, and I fear that the only way out of this situation is a political Balkanization of the entire continent. That means a disorderly fragmentation, with outlier countries being ruled by fascists or stalinists (In Greece, both are about the same influential size in parliament) and panic forcing a return to national currencies under great financial and fiscal turmoil.
I would of course like to see Europe make an orderly retreat from the EU project, and I wholeheartedly support Euroskeptic heroes like Nigel Farage in fighting to secure that orderly retreat. However, as things look right now I predict that the economic crisis that is sweeping like a bonfire across Europe will burn down the better of the European economy before Mr. Farage and his fellow Euroskeptics gain enough momentum to put out that fire with free-market reforms and structural reductions to Europe’s enormous government.
Unfortunately, there is a lot to back up that last prediction. One example: the Greek economy is going to contract by another 4.4 percent in 2013. The Greek have already lost one quarter of their GDP since the crisis began in 2009. This is nothing short of economic free-fall, a recession that has escalated into full-scale depression, fueled by the destructive forces of austerity.
Back to Benjamin Fox in the EU Observer:
Spain’s budget deficit has cleared 10 percent. The average eurozone country now has a debt to GDP ratio of 95 percent – a figure that observers had previously thought was applicable only to Italy and Greece.
Those observers thought austerity would improve economic conditions in the countries where it is applied. It does not, it never has and it never will.
Mr. Fox then notes that the crisis is spreading beyond its “origin”, Greece:
While the Greek economy will contract by a further 4.4 percent this year – by the end of 2013 Greek economic output will have fallen by more than a quarter in five years – the clear indication from the Winter Forecast is that Athens is no longer in the eye of the storm. Paris and Madrid now have that unwanted place. France was one of a handful of countries called out for censure by commissioner Rehn on Friday. The French budget deficit remains stubbornly high, falling by a mere 0.6 percent to 4.6 percent in 2012. The commission’s projections have it remaining above the 3 percent threshold in 2013 and 2014. Ominously, Rehn told reporters that the commission would prepare a full report on France’s public spending after Paris prepares its next budget plan, adding that President Francois Hollande’s government needs to “pursue structural reforms alongside a consolidation programme.”
The Eurocrats may get away with destroying 25 percent of the Greek economy. But before they set out to do the same to France, they should consider the law of big numbers. France is the second largest euro-zone economy. If you destroy one quarter of that economy, you will accelerate the current European crisis from a looming depression into something that could even be more devastating than the Great Depression.
Mr. Rehn and his Eurocrat cohorts are not playing with fire. They are playing with a macroeconomic Hiroshima.
Benjamin Fox at the EU Observer does not quite seem to get the magnitude of the problems he is reporting, but that does not take away from his reporting them:
Some of the figures that leap off the pages of the Spanish assessment are truly alarming. Spain’s budget deficit actually increased to 10.2 percent in 2012, although the data does not include the savings from spending cuts and tax rises at national and regional level in the final weeks of the year, estimated to be worth 3.2 percent. Even then, the country will still have averaged a 10 percent deficit over the last four years. By the end of 2014, its debt pile will have nearly doubled to 101 percent of GDP over the space of five years.
Well, the good old Keynesian multiplier will tell you that if you contract government spending by 3.2 percent of GDP in that short of a time period, you can expect the private sector to contract by at least as much over the next 4-6 quarters. However, a recent IMF study showed that the multiplier works faster for reductions in government spending than for any type of increase in macroeconomic activity. Therefore, the negative repercussions of these Spanish austerity measures could begin to make themselves known in the Spanish economy already in the first quarter of this year.
Such a contraction in private-sector activity will erode the tax base and increase demand for tax-paid entitlements. As a result, the deficit will bounce back up again and probably exhibit a net increase.
In other words, what Mr. Fox sees as a mysterious persistence in deficits is really a logical consequence of the economic policies of the Spanish central and regional governments.
One of the many social disasters that will characterize the permanent European decline is very high, very costly unemployment. Mr. Fox notes this:
The headline rate of 11.7 percent unemployment across the eurozone is bad enough, but it is the sharp rise in long-term joblessness that is most concerning. Forty five percent of the EU’s unemployed have been out of work for more than a year, and in eight countries this figure rises to over one in two. In Spain, Greece and Portugal, where the unemployment rate is above 15 percent and youth unemployment sits close to one in two…
That’s 50 percent youth unemployment. Consider what that means for the loyalty of the young toward their country – and its political, economic and cultural leaders.
…millions of Europeans risk being locked out of the labour market for good. In the foreword to the Winter Forecast, Marco Buti, head of the commission’s economics department, rightly acknowledges the “grave social consequences” resulting from the unemployment crisis. But it is more dangerous than that. As the commission paper concedes “long-term unemployment is associated with lower employability of job seekers and a lower sensitivity of the labour market to economic upturns.” The longer people are out of work, the more likely it is that high unemployment rates become a structural feature of the European economy.
Not to mention their proneness to support extremist political parties. Support for Golden Dawn, the Greek Nazis, does not come solely from the police and the military.
I am sometimes asked what I think Europe can do about this crisis. I have tossed and turned that question around, and I am sad to say that my answer is very short: “very little”. That said, here are some desperate measures that could at least give Europe a chance:
1. Fiscal cease-fire. Stop with the austerity measures right now.
2. Labor-market deregulation. Most of Europe suffers from very rigid hire-and-fire laws. Give Europe’s employers a chance to take on new workers without having to make a de facto life-time commitment to them.
3. Flatten the tax structure. One of Europe’s most discouraging features is the steep marginal income taxes. Give job creators a chance to keep more of their money.
4. Orderly EU retreat. Let the Euroskeptics design a plan to dismantle the entire EU project and liberate the nation states – and, most important of all, their peoples – from this authoritarian, growth-stifling, freedom-eating bureauacracy.
5. Bye, bye to the welfare state. Europe needs a long-term plan – unique to each country – to get rid of its entitlement-based welfare state. Some ideas for America can perhaps be of inspiration for Europe as well.
These are, again, some very short points. I do not see fertile ground for either of them at this point, let alone for a more elaborate plan. However, there may still be hope to save individual countries, such as Britain, if right-minded political leaders can gain more influence.
But even if Britain and a couple of other countries escape the fury of the current crisis, the political, economic and social landscape of Europe will look very different in five years than it does today. And it won’t be for the better of Europe’s suffering masses.
Just as the Eurocrats thought they had managed to talk down the euro crisis and save their beloved currency union, a little Danish boy steps out of the crowd and points out that the emperor still has no clothes. From Bloomberg.com (via Zerohedge):
Lars Seier Christensen, co-chief executive officer of Danish bank Saxo Bank A/S, said the euro’s recent rally is illusory and the shared currency is set to fail because the continent hasn’t supported it with a fiscal union.
I spent six years in Denmark. Danes are serious professionals, they are upfront, free-spirited and they have no problem speaking the truth. Culturally, When you hear this from a man in this position within the private sector in Denmark, you better listen.
“The whole thing is doomed,” Christensen said yesterday in an interview at the bank’s Dubai office. “Right now we’re in one of those fake solutions where people think that the problem is contained or being addressed, which it isn’t at all.”
Exactly. The main reason why the euro appears to be stable at this point is that the European Central Bank has put a cooler on the bonfire-like debt crisis by promising to buy any euro-denominated treasury bond, anywhere, any time. Technically, the promise was limited to the most troubled eurozone countries, but by implication it extends to all member states.
This uncapped promise has allowed international investors to go back into high-yield euro-denominated treasuries from primarily Greece, Portugal, Spain and Italy. Secondarily, they can also invest with similar confidence in French treasuries, which are next on the troubled-bonds list. Thereby the ECB removed a major reason for investor flight out of the euro, temporarily strengthened the currency and created the false impression that the crisis is over.
It is not. Bloomberg.com again, which paints a picture of declining GDP and a new phase in the debt crisis:
The European Central Bank forecasts the euro-area economy will shrink 0.3 percent this year … [and while] the euro has strengthened, the economies of Germany, France and Italy all shrank more than estimated in the fourth quarter. Ministers from the 17-member euro area met during the week to discuss aid to Cyprus and Greece as a tightening election contest in Italy and a political scandal in Spain threaten to reignite the region’s debt crisis.
Greece has suffered from a shrinking GDP for years now. Since the recession-turned-depression started they have lost roughly a quarter of their economy. That is extreme, but it shows the devastating consequences of combining austerity with an entirely artificial currency union. Furthermore, it should be a warning sign to the Eurocrats as well as other member states to not adopt the same kind of fiscal policy in their countries. Yet that is precisely what seems to be in the making: the “aid” to Cyprus and – again – to Greece will consist of a buyout of treasury bonds combined with austerity requirements.
There can be only one outcome: more of the same crisis.
As Bloomberg.com continues, it illustrates the dire situation of the European economy, a situation that according to Danish banker Christensen is going to be the undoing of the euro:
France is grappling with shrinking investment, job cuts by companies such as Renault SA and pressure from European partners to speed budget cuts. While Germany expanded 0.7 percent last year…
That’s a pathetic “growth” rate for an economy like the German.
…France posted no growth and Italy probably contracted more than 2 percent, the weakest in the euro area after Greece and Portugal, according to the European Commission. The economy is on the brink of its third recession in four years and the highest joblessness since 1998. Prime Minister Jean-Marc Ayrault said Feb. 13 the country won’t make its budget-deficit target of 3 percent of gross domestic product this year as the economy fails to generate growth and taxes.
The pursuit of a balanced budget is the enemy of growth. So long as the political leaders of Europe’s big welfare states do not want to concede that their countries can no longer afford their big, onerous, sloth-encouraging entitlement programs, there will be no change in the course of the European economy. The welfare states will continue to drive up deficits and drive down growth. The EU will continue to demand austerity, which will further drive down growth and widen the deficit gaps in government budgets. Europe will stagger and stumble, but there is no chance it will ever recover under its current big, redistributive goernment.
In a nutshell, all you Europeans: this is as good as it gets.
And just to add some more salt in Europe’s self-inflicted wounds, Bloomberg. com tops off with a stark reminder of the economic reality the Europe is stuck in:
“People have been dramatically underestimating the problems the French are going to get from this. Once the French get into a full- scale crisis, it’s over. Even the Germans cannot pay for that one and probably will not.” … Spain, which plans to sell three- and nine-month bills tomorrow and bonds maturing in 2015, 2019 and 2023 on Feb. 21, faces a sixth year of slump. Output is forecast to contract for a second year in 2013 with unemployment at 27 percent amid the deepest budget cuts in the nation’s democratic history. Public-sector debt is at record levels, having more than doubled from 40 percent of gross domestic product in 2008. The European Commission, which is due to update its forecasts this week, sees it rising to 97.1 percent of GDP next year.
This is the crisis that the ECB is trying to cover with an endless monetary commitment to defend the euro. But the deficits do not go away, and economic growth does not return. In its desperate fight to save the euro and the welfare state, Europe’s political leaders will bleed the former dry and deplete the latter of any money to honor its entitlement commitments.
I stand by my verdict: Europe is in permanent decline, it is turning itself into an economic wasteland of industrial poverty that over time will be left behind by North America and Asia.
For those of us who live or have lived in the reality created by austerity, this is nothing more than armchair sophistry. But even a pure theoretician or a strict academic economist should be able to conclude that austerity is thoroughly bad. Some do, actually, with a sincere mea culpa, which is obviously welcome.
That, however, does not stop some politicians from persisting in their belief that something good can come out of having government take more of people’s money while giving less back. From the EU Observer:
Blanket criticism of austerity policy misses the positive effect it has on market confidence, EU economic affairs commissioner has said in the face of negative statements by the International Monetary Fund (IMF). Referring to a report out last week in which IMF economists said the growth-dampening effects of spending cuts had been underestimated, Olli Rehn at a think-tank event in Brussels on Friday (11 January) said “one cannot draw, on the basis of this study, strong policy conclusions.”
Really? The report says that for every percent of austerity there has been an extra percent of GDP contraction that they did not account for. One percent of GDP typically means a full percent higher unemployment than otherwise. If you tighten the belt in an economy like Greece by one percent per year, you cause five percent higher unemployment by means of the under-estimation effect alone. Then you have to add the multi-year multiplier effects from each discretionary round of spending, which could very well be close to parity.
In plain English, this means that you can probably explain ten percentage points of unemployment in Greece just with the under-estimation of the negative multiplier effects of austerity.
If that does not give Mr. Rehn pause and make him rethink your policy conclusions, then he really needs to rethink his job.
The EU Observer again:
“In the political debate, what has often been forgotten is that we have not only the quantifiable effect – which is something that the economist like to emphasize – we also have the confidence effect,” he added. Taking Italy as an example, he asked “what would have happened” if Rome had decided to loosen fiscal policy in November 2011, when technocrat Prime Minister Mario Monti took the reins and started introduced spending cuts? “From November onwards, we have seen more consistent and prudent fiscal consolidation by Italy and we are seeing much lower bond yield for Italy, which brings savings to Italian tax papyers [sic] and facilitates return to economic recovery,” Rehn said.
First of all, the bond yield has nothing to do with the commitments to austerity. They are the result of the pledge by the European Central Bank to purchase an unlimited amount of treasury bonds from any euro-zone country in crisis. If a central bank offers to print an unlimited amount of money to buy an unlimited amount of treasury bonds, then of course other buyers of those bonds are going to feel confident that they can get their money back the day they wish to sell their bonds. The underlying fiscal policy trend becomes entirely irrelevant at that point.
Secondly, the “consolidation” has not led to a single new job in the Italian economy. All it has led to is an improvement of the national government’s budget balance in the year immediately following the austerity package – a trivial effect since that is the very purpose of higher taxes and less spending. But Mr. Rehn has yet to witness the repercussions of that new round of austerity on the Italian economy. Just like in Greece, this latest round of Italian austerity will lead to a decline in employment, growth and prosperity.
An IMF official last spring criticised the pace and depth of the budget cuts demanded from Greece, while Christine Lagarde, who heads the Washington-based institution, late last year said Athens needs more time to get its house in order. Rehn refused to accept the criticism on austerity, but he acknowledged that “the coming months will see tough times and social tensions,” because EU citizens will see improvements in their day-to-day lives “only with some delay.”
That’s what the Eurocrats and the IMF promised for Greece five years ago when they first imposed austerity on Greece. Five years later the country has lost one fifth of its GDP and youth unemployment is close to 60 percent.
At least the IMF has had the decency to admit (what we knew all along here at the Liberty Bullhorn, where Keynesian economics is the guideline) that they got it wrong. Now it remains to be seen whether or not the Eurocrats in Brussels will wise up.
Mr. Rehn’s stubborn support for austerity is a rather clear hint that they won’t.
In his classic “Times are changing” Bob Dylan asked “How many times must a man look up before he can see the sky?” I highly doubt that Dylan was referring to economic policy, but you never know… However, you could indeed ask that very question when it comes the austerity policies that the EU is shoving down the throats of the Greek people. After five years of austerity, and on its sixth year of a depression, Greece is now ripe and ready for yet another dose of the same medicine that has made the patient mortally ill.
German finance minister Wolfgang Schaeuble on Monday (14 January) urged Greek opposition leader Alexis Tsipras to drop his opposition to bailout-linked austerity measures, saying there is “no alternative” if Greece wants to stay in the eurozone. It was the first time the veteran minister and ally of Chancellor Angela Merkel received the young leftist leader, who has blamed Germany for the hardships which Greek people are enduring.
There is so much wrong with this picture, it is hard to know where to start. But first and foremost, it is quite frankly very disturbing that the Eurocracy and its allies in Berlin have the stomach to continue to pressure for austerity, after the huge mea culpa on those same policies that the IMF published less than two weeks ago. Since I find it hard to believe that Mr. Schäuble is incompetent, I am forced to conclude that he is actually a very arrogant man. Knowing that his austerity policies…
a) have done a great deal of harm to Greece, and
b) have been scientifically refuted as the remedy for the Greek depression,
…Mr. Schäuble apparently puts more emphasis on the raw government power measures that go with austerity, than on the actual oucomes of the policies.
As the EU Observer story continues, there is more evidence of this:
According to one official, Schaeuble told Tsipras “unequivocally that there is no alternative to the path already taken, the implementation of an economic adjustment programme.” The German minister urged Tsipras to back the programme, which includes recently-passed changes on income tax which Tsipras’ party, Syriza, voted against. A recent upgrade by six notches in Standard & Poor’s rating of Greek debt is proof the reforms are working, Schaeuble said.
No, it is not showing that the policies are working. It is showing that analysts at Standard & Poor still believe that higher taxes are good for economic growth. It also means that the analysts at S & P have not understood the enormously important paper that IMF chief economist Olivier Blanchard released, describing how the Fund seriously under-estimated the devastation that austerity would cause in Greece.
Ultimately, it is up to the folks at S & P to decide what they want to do. I just feel a bit sorry for their clients. They are now being told that the same policies that led to down-gradings for Greece over the past couple of years will now help that economy grow and thrive.
Better then to become a regular here at The Liberty Bullhorn, where we have been dead on about austerity from day one!
Back to Mr. Schäuble the austerity hawk, Mr. Tsirpas the Chavez socialist, and the EU Observer story:
For Tsipras, what matters more are the legions of unemployed people and hospital patients with inadequate care, whose situation, he said, is getting tougher each day as government slashes expenditure to please creditors and markets. “Austerity is like a bad medicine for the patient. We have to stop austerity,” he told this website on the eve of the meeting.
Mr. Tsirpas is correct, of course, but he is looking at the austerity issue with his left eye only. His alternative for Greece is to stop austerity but then start converting the country into a so called Bolivarian socialist republic. Anyone who wants to know what that means can take a look at Venezuela, where Mr Tsirpas’ role model Hugo Chavez has brought about 30 percent inflation, destroyed property rights, scared away every serious foreign investor, allowed crime to skyrocket and created food shortages.
No, the only serious alternative to austerity is to structurally reform away the welfare state. Economic freedom, and only economic freedom, can restore prosperity in Greece.
That said, I am the first to recognize that if you reformed away the welfare state and eliminated most of the taxes in Greece today, there would not be a viable private sector there to step in and replace a crumbled government. It is going to take seriously hard work on behalf of both government and the private sector to rebuild Greece. The role of government will be to rebuild macroeconomic confidence. Once that is under way the private sector can flourish and provide for all the needs of the Greek people that the government had promised to cater to but walked away from.
I fear that won’t happen this side of a totalitarian coup, either by the radical left or, more likely, by the neo-Nazis. That would be a very high price to pay for the Greeks, and for Europe. Their suffering would be the final indictment of the reckless attempts by the EU, the ECB and the IMF to save the European welfare state by means of austerity.
And since the austerity policies have been put in place to save the welfare state, the collapse of Greece into a dictatorship would be the ultimate piece of evidence that the difference between the welfare state and the totalitarian state is a matter of time.
Yesterday I discussed the IMF’s admission that they have blatantly miscalculated the effects that austerity would have on European economies. In an intellectually very honest research paper, chief IMF economist Olivier Blanchard and his co-author Daniel Leigh explain that the Fund seriously under-estimated the negative effects on GDP that would result from austerity measures.
I took the opportunity to gloat a bit yesterday. I felt I had the right to do so since I have been pointing to the disasters of austerity since the summer of 2010 when I published my book Remaking America: Welcome to the Dark Side of the Welfare State. There, I presented the disastrous effects of austerity policies on the Swedish economy, including evidence of a serious decline in private economic activity.
Today I would like to take one more step in the analytical direction. The IMF did a good job in explaining its errors, and given how serious the consequences are of their miscalculations, it is important that we understand what they did wrong. This insight can help legislators and policy analysts avoid making the same mistake all over again.
In plain English: those who still endorse austerity better pay very close attention.
The IMF mea culpa paper is called Growth Forecast Errors and Fiscal Multipliers. It explains two things:
- The Fund made policy recommendations on erroneous data; and
- The Fund’s data errors resulted in a miscalculation of the multiplier effects of austerity by a well defined number.
As for the policy recommendations, there was a lot of damage done. I am not going to go into details on that damage – though as far as Greece is concerned I suggest this paper which I published this past summer – but I will suggest that the effects of austerity are clearly visible in European GDP data.
That data, however, is the ex-post austerity data. It presents the numbers that show what the effects are; obvoiusly it is not the data that the IMF would use for its forecasting of what the effects would be of their recommended austerity policies. That data has to come from earlier periods in the economy.
And it is right here that the Fund made its mistake.
In order to forecast the effects of fiscal policy measures, economists use models that show how various sectors of the economy affect each other over a defined period of time. The most critical of those “transmittors” of economic activity is the multiplier, a centerpiece of modern macroeconomics. British economist Richard F Kahn was the first to analytically define the multiplier; his 1931 article The Relation of Home Investment to Unemployment played a crucial role in the development of new fiscal policy measures in Britain.
John Maynard Keynes gave the multiplier a very important macroeconomic context in this book General Theory of Employment, Interest and Money. Based on his work, in turn, John Hicks developed the formalized foundations for modern macroeconomic modeling, now known as the IS-LM model. Any use of this model – in any of its modern forms – incorporates the use of the multiplier.
A multiplier shows how the spending of an extra $100 by consumers will spread through the economy and magnify the initial spending. By the same token, a multiplier also shows how the removal of $100 worth of spending from the economy will spread through the economy. The spreading effects, so to speak, vary depending on, primarily:
- Who increases or decreases spending – consumers, government, businesses or foreign markets buying our export products;
- What kind of spending is involved – an increase or decrease in government spending on bureaucrat salaries has less immediate effects on the economy than a change in consumer spending at retail stores; and
- When the spending change takes place.
It was this last item that the IMF messed up. Here is how they summarize their new findings:
Robustness checks indicate an unexpected output loss, relative to forecast, that is for the most part near 1 percent and typically above 0.7 percent, for each 1 percent of GDP fiscal consolidation. We obtain similar results when we extend the analysis to forecasts for all advanced economies. … Looking within the crisis, we find evidence of more underestimation of fiscal multipliers early in the crisis (for the time intervals 2009-10 and 2010-11) than later in the crisis (2011-12 and 2012-13).
The meaning of this is, in a nutshell, that if the IMF recommended spending cuts and tax increases equivalent to one percent of a country’s GDP, they knew that this would have a negative effect on GDP growth. What they did not know was that the effect was going to be a whole percent of GDP larger than they estimated.
This may sound like a mere technicality, but it is not. The practical, everyday-life effects of such a forecasting error almost reach catastrophic levels.
Consider the following example. A country has a GDP of $100 billion. Let’s say taxes and government spending comprise 30 percent of GDP at $30 billion, and that there is a three-percent-of-GDP deficit. That would be $3 billion. The IMF and its European partners, the EU and the ECB, fly in and recommend an austerity package with tax hikes and spending cuts totaling $1 billion. They do this knowing that there will be a contraction of economic activity. According to their models that contraction will amount to $1.5 billion (with a multiplier of 1.5).
Enter the forecasting error of one-to-one percent: for every percent of proposed spending cuts there is another percent of spending losses, on top of the $1.5 billion forecasted. The total drop in GDP, as a result of the austerity package, is now $2.5 billion. That extra billion of lost GDP means that unemployment goes up more than expected, corporate investments fall more than expected – as does private consumption – and that tax revenues shrink more than expected.
Obviously, the larger the initial cut in spending, the larger the forecasting error. A program to cut the entire deficit in one year would lead to an extra, unanticipated loss of GDP amounting to $3 billion.
The most immediate effect of this would be a loss of a full $1 billion of tax revenues. The IMF would in other words over-estimate the ability of its austerity policies to close the budget gap. Instead of resulting in a balanced budget their package will result in a $1-billion tax revenue shortfall.
When the IMF and national policy makers see that their budget is still exhibiting a significant deficit, they double down on their austerity policies and launch another round of tax hikes and spending cuts. The same forecasting error now compounds over two years, resulting in a chain reaction of persistent deficits. Not realizing that the medicine is killing the patient, the IMF would then recommend yet another round of austerity.
One major reason why the IMF apparently got the multipliers wrong is that the multipliers change over time. They are larger when the economy is growing strongly and just enters a downturn than they are when the economy is at the depth of a recession. There are two explanations for this: there is more spending out there that consumers can easily repeal when they sense a change in economic conditions; and there is widespread uncertainty and resistance to spending in a recession.
I developed the latter point in my doctoral dissertation back in 2000 (published in 2002 by British academic publisher Ashgate). The mainstream of macroeconomics has yet to take into account the role of uncertainty, which means that its practitioners – especially in the forecasting business – are vulnerable to making forecasting errors of the kind the IMF has made. I do not blame them for it; modeling uncertainty is almost an oxymoron. Uncertainty is very difficult to quantify, though it can be done. But the methods for doing so are incompatible with current practices in econometrics.
Back to reality now. The compounded forecasting errors by the IMF have in all likelihood played an instrumental role in putting the Greek economy through five straight years of shrinking GDP. Regardless of why the IMF made its mistakes, the consequences are enormous. In fact, I suspect the repercussions will be felt through the economics community for years to come. Leading academic economists need to ask themselves if their almost theological obsession with training graduate students in econometrics – and nothing else – really is the right thing to do.
For policy makers, the IMF mea culpa is a huge red flag. The worst thing to do for U.S. Congress at this point is to embark on a European-style austerity crusade. A far better strategy is structural reform that gradually but permanently will phase out costly, runaway entitlement programs.
My fellow free-market think-tankers also better pay attention. This entire issue is a big package of evidence that it is always worth doing the hard, analytical work rather than pumping out pointless talking points. But it is also yet more evidence that Keynesian economics, as opposed to Austrian theory, is still a superior analytical instrument in economics.
Immigration is a very tense topic in Europe. A rising number of immigration-skeptical political parties are growing in influence throughout the EU. They cover a relatively broad spectrum, from borderline fascists like the British National Party or the Party of the Swedes, to traditional European nationalists like Fidesz in Hungary and True Finns in Finland, to those that only want to curb immigration and emphasize assimilation of immigrants. This latter category is represented by a Scandinavian duo, the Danish People’s Party or the Swedish Democrats.
Sweden actually provides a good illustration of how tense the immigration issue is in Europe. According to Eurostat data, Sweden grants residency to anywhere between 75,000 and 90,000 immigrants per year. Given that the total Swedish population is just over 9 million, this is a significant immigration, the largest in Europe by share of population. Most of the immigrants Sweden receives are from muslim, non-European countries such as Afghanistan and Somalia.
If the United States had an immigration on the same scale as Sweden does, we would grant green cards to some three million people each year, most of whom would come with less than middle-school education, often with a rudimentary understanding of what it is like to live in a modern, industrialized society, and most of whom would have as their value basis a very rigid form of Islam.
There is a reason why we don’t have this kind of immigration in America. It is practically impossible to assimilate such large numbers of people in one year. It is akin to a national crisis to allow such immigration for a few years time. It escalates toward a national disaster if this kind of inflow continues for more than a decade.
Sweden is right there, right now. Since 2000 the small, northern European country has opened its borders to about one million immigrants, most of whom from non-European, non-Western backgrounds – and for the most part with very little education. Needless to say, this creates a powder keg of social tensions, cultural conflicts, unemployment (how many jobs are there in a country like Sweden for a Somali man in his 40s with one or two years of Koran school on his resume?), competition over housing (imagine if we here in America had to build a new St Louis every year – and then some) and, when the immigrants have been isolated in the enclaves long enough – a surge in crime.
Sweden has among the highest rates of violent crime in the industrialized world. Gothenburg, the country’s second largest city with 750,000 residents, has a 75-percent higher violent crime rate than slightly larger Cleveland.
The unrelenting crime spree in that formerly peaceful country is almost entirely caused by irresponsible immigration. Another social and economic problem is that immigrants are vastly over-represented on welfare rolls. The combination of rudimentary education, a very tight labor market and a generous welfare state is a recipe for life-long dependency on taxpayers’ dole.
But it is also an immigration magnet in itself. Even though the statistics are not entirely easy to disseminate with regard to the motives immigrants have, aforementioned Eurostat data show significant discrepancies between asylum seekers and total immigration. This discrepancy is relevant: a continent that is suffering from the highest and most persistent unemployment rates since the Great Depression is hardly in need of workforce immigration. When people come to unemployment-plagued Europe for no other reason than to look for work, and when their education and experience do not give them much of a chance of finding a job in the first place, chances are they will end up on welfare.
This is precisely what has happened in Sweden. Other countries have seen the same problem.
One of them is Greece. The difference between Greece and Sweden is that since Greece has had a tighter immigration policy for many years, most of their immigrants have been illegal. That has changed with the last few years of a depression-style economic crisis. The EU Observer has recognized this in a series of articles. The first one is straight from the border:
A 12.5-km-long fence rolled with barbwire runs across plots of garlic and asparagus on the Greek-Turkish border. For the small farming community at Nea Vyssa, the presence of Greek military and police is a welcome relief from the mass of irregular migrants crossing from Turkey on a daily basis before the summer. “Sometimes a hundred or so would arrive in one day and wait for the train to come,” one local villager said.
Not everyone is happy about this border fence. The Eurocracy, e.g., which prides itself on being politically correct and welcoming all sorts of immigrants with open arms:
The barrier – bankrolled by the Greek state – was roundly condemned by EU officials when it was first announced over the summer. Greece has been arguing its border is an EU issue which merits EU help. But it also sees the mass arrivals of migrants as a threat to its Hellenic identity and national security.
And here comes the real political reason why it was so important to roll out razor wire along the border:
The 450,000 Greeks who voted for the neo-fascist Golden Dawn party on the back of a virulent anti-immigration campaign illustrate the strength of feeling.
This of course frightens people high up in the do-good Eurocracy, where a more “kind” form of immigration regulation is gaining support. The focus, as the EU Observer reports, is more biased toward keeping borders open than to protect the ailing European economy against even higher welfare costs. This is evident in, e.g., the European Parliament…
whose committee on civil liberties amended … draft legislation to include provisions on saving migrant lives at sea. “Saving the lives of migrants in the Mediterranean sea is absolutely necessary. [Migration management agreement] Eurosur will improve cooperation between EU member states and the Frontex border control agency,” said Dutch Liberal MEP Jan Mulder, who drafted the parliament’s position.
The contrast between this theoretical ideal and the harsh realities on the Greek-Turkish border could not be stronger:
Meanwhile, watchtowers on either side of the shimmering barbwire overlook a territory that once spelled hope for tens of thousands of people entering Greece from as far away as Afghanistan. Last year, some 55,000 were detected wading across the Evros river that forms the Greek and Turkish border. … The fence has won praise, especially among those who patrol, armed with weapons, along its edge. … The number of people who attempt to cross the border has plummeted. Those apprehended in the south of Evros are now sent to Greece’s naval military base in Poros Island.
A second article by the EU Observer sheds more light on the true nature of illegal immigration into Europe, especially via Greece:
A chief of police in a border town in northeastern Greece says irregular migrants are no longer crossing into the country from its land border with Turkey. Barbed-wire fences, landmines, thermal night vision cameras and regular patrols are among the tools used to stop a phenomenon the Greek state considers a national security threat. Some 55,000 people were detected attempting to wade across the Evros River into Greece from Turkey in the region in 2011. The figures have now dropped to near zero, says Pashalis Syritoudis, director of police in the run-down Greek border village of Orestiadas … He says the trend stopped since Greece launched Operation Xenious Zeus in early August. Migrants are now targeting the more treacherous sea crossings near Lesvos, Sumos, Symi and the Farmkonis islands instead. “We have given a very clear message to … [migrant smugglers] and their source countries in North Africa and other countries that Evros is no longer an easy passage to enter Europe,” Syritoudis noted.
Human trafficking used to be associated with prostitution and slave trade (especially from East Africa to the Arabian peninsula) but over the past couple of decades it has increasingly shifted to smuggling people from deplorably poor countries to Europe. This has now become a self-fulfilling prophecy in the sense that the smugglers want to keep their lucrative business going. As the EU Observer notes, the smugglers have no concern who they take money from or what conditions they subject their “merchandise” to:
One [border patrol] officer, who did not want to give his name, told this website that his unit apprehended a young man from Pakistan in the winter whose hand had frozen solid. “We had to cut off his hand. He told us to send him back, that he was now useless to his family. We felt sorry for him, not because he lost his hand, but because he was no longer a value to his family,” he said. He said he had also seen pregnant women and young girls trying to cross the river. In one case, a Pakistani woman had a baby on the road just 10 days before crossing the river. “You begin to understand that things must be terrible for them to take such risks and I really feel for them but at the same time we feel unnerved, unsettled by their presence and numbers. We are terrified by this invasion,” the officer said.
The invasion consists of hundreds of thousands of immigrants who flock the streets of Greek cities, and countless others coming to other European countries. Again, this is what Europe’s nationalist and immigration-skeptical parties are reacting to – and it would be a disastrous mistake not to take this skepticism seriously. If the democratic, non-authoritarian, immigration-skeptical parties cannot win enough legislative support for very tight immigration laws – and very tight enforcement of them – then immigration-skeptical voters are going to turn to the “next line of defense” which eventually comes down to parties like the British National Party and Golden Dawn in Greece.
Free global movement of people is an essential part of a free world. But it cannot be combined with a welfare state that promises people a life on taxpayers’ tab. If Europe wants more immigration, it is going to have to give up the welfare state. If on the other hand it wants the welfare state, it is going to have to give up immigration.
If Europe’s political leaders don’t appreciate this choice, they will invite ugly, totalitarian parties to take over the entire continent, one country at a time.